Revisiting The Big Four Social Media Stocks

Nearly a year ago, I put the ‘Big Four’ social media companies under the microscope, asking whether Facebook, LinkedIn, Yelp and Twitter had lasting power, and perhaps more importantly, were they good investments? Is it possible that what we are seeing is a replay of the dot-com era of the late 1990’s, when so many seemingly promising companies went bust after having been exposed as nothing more than a house of cards, with no profits and no enduring value?

A year later this much seems increasingly clear: This is not 1999, and these firms are not the latest versions of Ask Jeeves, Pets.com, Myspace and Homegrocer.com. Indeed, the ‘Big Four’ have continued to grow and mature, and in their own way have become even more ingrained within our culture, particularly Facebook, which today is a verb as well as a noun.

At the same time, questions still hover over social media. Questions that are very similar to the ones that continue to linger over the entire market more than four years into an unprecedented rally: Is this real and how long can it last? Let’s take a look:

Facebook – Compared to a year ago, Facebook is even more of a force, the undisputed king of social media and now, mobile. The irony, of course, is that every day it looks less and less like a social media company and more and more like an ad platform. While other players within the space are continually looking for new ways to monetize their platforms, beef up ad revenues and grow their users, Facebook has largely conquered such obstacles and has moved on to bigger and better things: Namely, taking aim at Google, and to a lesser extent, Amazon. Google still attracts more online ad dollars than any company in the world, but Facebook has cut into this lead and over the last year has made significant investments to better compete in several areas that could prove critical moving forward, including virtually reality, streaming video, messaging, as well as satellite and aerospace technology. In many ways, owning a part of Facebook means owning a part of the future. Even more encouraging is that Facebook is really profitable and growing at a very high rate.

Twitter – After its debut last November, the stock shot through the roof. Then almost as quickly, it came down to earth, as jittery momentum investors jumped ship and company employees cashed out after the shareholder lockout expired. But strong second-quarter earnings, along with a spike in its user growth rate, fueled a comeback and ever since much of Twitter’s volatility has vanished. Still, going forward it has to prove it can consistently add active users, the key to attracting ad dollars. The platform is perfect for news and sports junkies who want information in real time. But for people who want to interact with their friends, Facebook is still to the go-to destination. Until this changes – and it’s a long shot that it ever will – it is hard to justify Twitter at its current valuation, especially given that it has yet to turn a profit and does not look like they will anytime soon. Twitter has made progress with their ad platform and revenue is growing but they still have a long way to go to prove their model works for shareholders.

LinkedIn – In the last year, LinkedIn has only further established itself as the leading online destination for professionals looking for networking opportunities and companies in search of top talent. Competition within this market has virtually dried up, as many of the online job search pioneers such as Monster and Yahoo! Hot Jobs struggle to stay relevant against LinkedIn’s multiple streams of revenue, which are derived principally from outside ads, premium subscriptions and access to its database of resumes. Unlike Twitter, LinkedIn has shown it can consistently turn a profit. One concern going forward, however, is whether advertisers will continue to look at LinkedIn’s platform as a viable place to reach consumers, since its primary focus is on professional networking. Also, recent attempts to make the platform more interactive and introduce news feeds have had a muted impact. LinkedIn has not evolved much in the last year and seems to have become comfortable in their niche, professional networking.

Yelp – Yelp has a growing number of unique visitors each month and its aggressive expansion effort into several key international markets, including France, the U.K. and Germany, continues to bear fruit. Yelp has become a very powerful search business with many engaged and loyal users. With only two games in town for search, Google and Yelp, Yelp has positioned itself for further growth as review based search is more reliable and profitable for advertisers. Yelp has little competition and is now profitable. Anyone who wants to compete in search needs to acquire Yelp or be left in the dust like Bing and Yahoo. The fact remains that Yelp is a trusted source on the internet and will continue to grow and be more profitable over time.

Without exception, all the above companies are better positioned today than they were a year ago. Indeed, these are strong, well managed, growing companies. It is clear that this time around, unlike the 90’s, the ‘Big Four’ social media companies have large valuations but have good business models with strong revenue growth and profitability. The ‘Big Four’ social media companies are here to stay and for long term investors, still present a good opportunity. Of course, this is not for everyone, one must make sure they are comfortable with the volatility that is a part of owning high valuation, high growth stocks as well as the ability to be in it for the long term. For those who are patient investors, there are very few companies growing as fast as the ‘Big Four’.

Ross Gerber is CEO and president of Santa Monica, Calif-based Gerber Kawasaki independent investment advisory and wealth management firm. Gerber Kawasaki clients and employees may own positions in various companies mentioned in the article. Investors should do their own research.